That’s the new black according to Citi’s Steven Englander:
Since May 1 the median increase in 10-year local bond yields in 47 major EM and developed markets (DM) is 39bps (Figure 1). Among major EM economies (light blue) it is 83bps; among major DM (dark blue) economies it is 29bps. The US 10-year Treasury yield increase (red) is only at the median of developed economies and well below the overall median. In both EM and developed economies, the fat tail of rate increases is to the upside, so average increases are even higher. The paradox is that the run-up in US interest rates, which is arguably the primary driver of these global rate increases, is well below the average and median globally.
FT Alphaville was cordially invited to talk about the collateralisation of commodities at two separate conferences this past month. We thank IHS Global and the Association des Economiste Quebcois for the opportunity.
The crux of our argument was that you can’t really understand what’s going on in commodity markets unless you appreciate that commodities are no longer a pure consumption-based market. Read more
The disconnect we’ve noticed between commodity fundamentals and forward rates appears to be popping up in other asset classes as well.
Priya Misra, rates strategist at Bank of America Merrill Lynch, makes a very interesting point on Friday about what she sees in her sector. Read more
So Glenn Stevens likes the nags after all.
Well, sort of.
For the first time since he took the helm of the RBA in 2006, the governor did not tinker with interest rates on Melbourne Cup day (a public holiday across parts of the country). Read more
Buried in Morgan Stanley’s decent third-quarter results (excluding the absurdity that is DVA of course) is this intriguing footnote:
Morgan Stanley’s average trading Value-at-Risk (VaR) measured at the 95% confidence level was $63 million compared with $76 million in second quarter of 2012 and $99 million in the third quarter of the prior year. The Firm modified its VaR model this quarter to make it more responsive to recent market conditions.
While interest rates are likely to stay low for some time yet, they can’t be that way forever. When rates finally go up, banks could be in a position to profit — provided their balance sheets are ready.
An investor could attempt to research which banks will be best placed for such a shift. For retail banks in particular, since their business models are not as diverse as investment banks, a handy disclosure to look for in financial statements would be net interest income sensitivity. Read more
(That’s Lisa, at Thursday’s European Central Bank press conference) Read more
Every now and then, The New York Times takes a big ol’ swipe at derivatives for being evil and whatnot. That’s fine and well — and sometimes obligatory, particularly when it comes to certain structured products for which it’s hard to discern the benefit to anyone outside of a bank.
But it can all go awry when someone starts arguing against derivatives and just gets it wrong. It makes us do a sad, frowny face
and then get incredibly frustrated. Read more
Iceland, of course. Kitchen-sinked and cleaned-up, the Icelandic central bank has just decided to push up rates by 25 basis points to combat signs of inflation amidst “robust” domestic demand.
Statement: Read more
Real rates, to cut a long story short. Treasuries should be returning to trade inversely to equities, although stocks didn’t soar on the two days this week that bonds have slumped.
While eurozone sovereign debt did improve. Read more
Interesting exchange in the latest minutes of the TBAC – Treasury Borrowing Advisory Committee, which brings together primary dealers and US Treasury officials… (Hat-tip Bondscoop)
The question was asked if it made sense for Treasury to permit bids and awards at negative interest rates in marketable Treasury bill auctions. DAS Rutherford [Matthew Rutherford, Deputy Assistant Secretary for Federal Finance] noted that there were operational issues associated with such a rule change, but that the hurdles were not insurmountable. It was the unanimous view of the committee that Treasury should modify auction regulations to permit negative rate bidding and awards in Treasury bill auctions as soon as feasible. Rutherford noted that any decision on this policy change would likely be made at the May refunding. Read more
The obvious place to start when discussing the impact of Wednesday’s FOMC meeting on US banks is with the downward pressure on net interest margins that will result from the extended period of low rates.
A short, helpful note from Nomura’s Brian Foran breaks down the issue into various components, and we’ll present each in order. Read more
The below is from the FT’s Money Supply blog that covers all things central banky.
So the Federal Reserve on Wednesday will publish forecasts which will show us how long it plans to keep rates at more-or-less zero. Hasn’t it done that already? Read more
Brazil’s central bank has cut interest rates for the fourth time running as the government seeks to revive an economy that stalled in the second half of last year, says the FT. The 50-basis point cut in the central bank’s benchmark Selic rate to 10.5 per cent comes as Brazil’s development bank, which has a balance sheet four times the size of that of the World Bank, announced a reduction in lending last year in a move that should also aid efforts to ease rates. “The monetary policy committee understands that to mitigate in a timely way the effects coming from a more restrictive global environment, a moderate adjustment in interest rates is consistent with the convergence of inflation to the target in 2012,” the central bank said. The central bank abruptly ended a tightening cycle in August after Latin America’s largest economy began slowing on the back of tighter monetary and fiscal conditions, the negative impact of a strong currency on manufacturing and the eurozone crisis.
The Federal Reserve board will put the finishing touches to a new plan for communicating its strategy to the public at its December meeting, ahead of unveiling the plan early next year, the WSJ reports. To make its stance on interest rates clearer, the Fed could divulge more of its forecasts for growth, employment and inflation each quarter. Fed officials have already sought to guide markets away from expecting a rate increase before “mid-2013″. The new communications regime may also see a formal declaration of the Fed’s informal 2 per cent inflation target, accompanied by a description of its goals with regard to the unemployment rate. Read more
And so it begins. The softening up exercise for another splurge of QE.
From the Bank of England’s depressing November inflation report. Read more
There’s something for everyone in the Chinese PMIs for October:
BEIJING, Nov. 1 (Xinhua) — China’s Purchasing Managers’ Index (PMI) dropped to 50.4 percent in October after rising for two consecutive months, down 0.8 percentage points from September, the China Federation of Logistics and Purchasing (CFLP) said Tuesday. Read more
The Reserve Bank of Australia cut its main cash rate by 25 basis points to 4.5 per cent on Tuesday, Reuters reports, as it reacted to benign inflation figures at home and threats to the global economy. The highest interest rates in the developed world have shrunk business credit and sent mortgage growth to its lowest level since 1977. Government data on Tuesday showed Australian house prices fell by the most in almost three years last quarter while sales of new homes were the lowest in a decade in September. Read more
PRESS RELEASE 6 October 2011 - Monetary policy decisions.
At today’s meeting, which was held in Berlin, the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 1.50%, 2.25% and 0.75% respectively. Read more
Or, why this letter is likely to make its way quickly into the recycling bin.
Just a couple of weeks ago, the conventional wisdom was still for a 50bps rate cut at Thursday’s ECB meeting — Jean-Claude Trichet’s last as ECB president — in light of rising expectations rise of an eurozone recession. Read more
Market expectations for US inflation have dropped to their lowest level in a year and are now below the Federal Reserve’s unofficial target, as investors respond to the central bank’s latest attempt to stimulate the economy, the FT reports. The expected rate of inflation over the next 30 years, as measured by the difference between Treasury Inflation Protected Securities, Tips, and cash government bonds, dropped as low as 1.85 per cent in recent days from 2.73 per cent since last month. The rate was just under 2 per cent on Tuesday. The drop in long-term inflation expectations came after the Fed announced Operation Twistlast week, a policy aimed at driving down long-term interest rates. So far it has not approached the lows of summer 2010, when investors feared the economy was in danger of tipping into deflation. Read more
Financial markets are forecasting interest rate cuts in the eurozone as early as November, says the FT, in a sharp reversal of monetary policy expectations due to a deterioration in confidence surveys and growing worries about Europe’s debt crisis. Although many economists do not think the European Central Bank will signal rate cuts at Thursday’s press conference following the monthly rate-setting meeting, the market is predicting a 92 per cent chance of a quarter point rate cut in November. Only a few weeks ago, the markets were predicting a slim chance of more rate hikes before the end of the year following two quarter point increases in April and July. Read more
Brazil’s central bank has taken the unexpected decision to cut interest rates, bringing its seven-month tightening cycle to an end as the country prepares for slower growth and a sharp deterioration in global markets, the FT says. Brazil’s central bank slashed its key interest rate to 12 percent from 12.5 percent on Wednesday in a shock decision, Reuters reports. All 20 analysts in a Reuters survey had expected the central bank to keep the Selic rate unchanged. “The government and the central bank are reacting in a coordinated manner to the global slowdown through a preemptive tight fiscal/loose monetary stance,” Barclays Capital analysts wrote in a note, adding that the decision is “unexpected and unprecedented.”. Read more
On the bright side, at least the ECB left more room to cut rates?
Sometimes, you have to turn to US history to realise how very confused the eurozone is at the moment…
Merkel and Sarkozy want balanced member-state budgets in 2012, but no eurobonds for the foreseeable future. Interestingly, in the 1840s, US states almost all added balanced budgets to their constitutions after a huge debt crisis. In fact after some states defaulted. But then again “eurobonds” already existed in this case. Read more
So much focus on government debt lately — won’t somebody please think of the household leverage?
Morgan Stanley’s Global Monetary Analyst team has: Read more
The minutes of the last MPC meeting are out and here’s the price action in the Great British Krona.
The Bank of Japan raised its economic assessment for a second consecutive month after companies ramped up production, Bloomberg reports. Governor Masaaki Shirakawa and his policy board left the benchmark lending rate between zero and 0.1 percent at a meeting in Tokyo on Monday. They also kept unchanged a 10,000bn yen ($125bn) fund to buy assets such as corporate bonds and exchange-traded funds.
Ever pondered the big questions? The meaning of life? Are we alone in the universe? What will happen to European RMBS once interest rates start rising? We have.
And we have an answer — to the last one anyway. Read more
Bank analysts have swung behind the view that China will limit or even suspend interest rate increases for the rest of the year, says Bloomberg. JPMorgan, HSBC, and Goldman analysts all said that Wednesday’s 25bps hike was likely to be 2011′s last, as Chinese inflation becomes “controllable”. But a Chinese central bank adviser also called for further tightening of deposit rates, saying they were still below inflation, according to the WSJ. Inflation is likely to have reached 6 per cent in June, but the central bank will be cautious of raising rates too far unless they damage borrowing costs for local government debt over the edge, the FT says. Read more